IASB Conceptual

Framework
 Conceptual Framework for Financial
Reporting or Framework.
Used as a reference or guide in
development of IFRS for the preparation
and presentation of Financial Statements.
Not an accounting standard.

What is the Conceptual

Framework?
 Assist the IASB in review and development of future
IFRS (International Financial Reporting Standards).
Harmonization of standards and procedures and reducing
alternative accounting treatments.
Assist national standard-setting bodies in developing
standards.
Assist preparers of financial statements in conformity
with applicable IFRS.
Assist auditors in formulating audit opinion.
Provide information about the work of IASB.

Purpose of Conceptual
Framework
A. Objective of Financial Statements
B. Qualitative Characteristics of Useful
Information
C. Elements of Financial Statements
D. Concepts of Capital and Capital
Maintenance

Scope of Conceptual
Framework
 According to IAS 1, Financial Statements are considered as
general-purpose catering to accounting/financial
information needs of users for decision-making.
Concentrated to primary users The objective of Financial
Statements is to provide information about the financial
position, financial performance, and cash flows of an entity
that is useful to a wide range of users in making economic
decisions.
Assessment of the entitys Liquidity, Solvency, Profitability
and Operating and Financial Flexibility.
Assessment of stewardship of the management.

A. Objective of Financial
Statements
 How do users assess liquidity, solvency, profitability,
operating flexibility and stewardship of mgt.? Financial
Statements.
Complete Set of FS 1. Statement of Financial Position
(formerly Balance Sheet)
2. Statement of Comprehensive
Income (formerly Income
Statement)
3. Statement of Cash Flows
4. Statement of Changes in Owners
Equity
5. Explanatory Notes

A. Objective of Financial
Statements
Statement of Financial Position
Measures the entitys financial position as
of the end of the reporting period in terms
of Assets, Liabilities and Equity.
Liquidity and Solvency of the entity.

A. Objective of Financial
Statements
Statement of Comprehensive Income
Measures the entity financial performance
for the period ended in terms of Income
and Expense.
Composed of two (2) parts: (1) Profit and
Loss and; (2) Other Comprehensive
Income.

A. Objective of Financial
Statements
Statement of Cash Flows
Measures the entitys cash disposition in
terms of Cash Receipts and Cash Payments
arising from Operating, Investing and
Financing activities.
Measures the entitys ability to generate
cash and cash equivalents.

A. Objective of Financial
Statements
Statement of Changes in Owners Equity
Presents information and identifies the
changes in assets and liability balances
arising from equity participants.
Presents information regarding equity
balances from operations, contributions
from, and distributions to owners.

A. Objective of Financial
Statements
Explanatory Notes
Presents information relevant to decision-
making but not presented in the face of the
financial statements.
This includes schedules for computations,
disclosures of accounting policies and
accounting estimates and other relevant
information among others.

A. Objective of Financial
Statements
Underlying Accounting Assumptions used
in preparation of Financial Statements:
Going-concern
Accounting entity
Accrual basis
Periodicity
Measurement Unit
A. Objective of Financial
Statements
Responsibility and Limitations of
Financial Statements
Management is responsible.
Cannot provide all information.
For primary users.
Common financial information is assumed.
Use of estimates and judgments.
A. Objective of Financial
Statements
What are the Qualitative Characteristics of
Financial Information?
Characteristics of financial information which
make it useful to users.
These apply to all information provided in the
complete set of financial statements.
Divided into two (2): (1) Fundamental
Qualitative Characteristics and; (2)
Enhancing Qualitative Characteristics.

B. Qualitative
Characteristics
 Qualitative
Characteristics

Fundamental Enhancing

Faithful
Relevance Comparability Verifiability
Representation

Confirmatory
Predictive Value Completeness Neutrality Timeliness Understandability
Value

Freedom from
Materiality
Error
What are Fundamental Qualitative
Characteristics of Financial Information?
Relevance
Faithful Representation

B. Qualitative
Characteristics
What makes a financial information Relevant?
An information is said to be relevant if the
inclusion or exclusion of an information or a
business event will affect the decision or
evaluation of the user.
Bears on the economic judgment of the decision-
maker.
3 sub-qualities: (1) Confirmatory Value; (2)
Predictive Value and; (3) Materiality.

B. Qualitative
Characteristics
Confirmatory Value
Also known as feedback.
Allows the user to confirm earlier expectations for a further
understanding of the business events of the entity.
Predictive Value
Allows the user to predict future outcomes of a transaction or
business event.
Intelligible Prediction.
Materiality
Threshold or cut-off point for recognition
Relative and judgment-based.

B. Qualitative
Characteristics
What is Faithful Representation?
Transactions and business events that
transpired are represented reasonably.
Faithfully represents what it purports to
represent or could reasonably be expected to
represent.
3 sub-qualities: (1) Completeness; (2)
Neutrality and; (3) Freedom from Error.

B. Qualitative
Characteristics
Completeness
Substantial depiction of transactions and business events that
transpired.
Neutrality
Not biased toward a particular need of users or desires of
specific users.
Avoiding pre-determined outcomes or results.
Freedom from Error
No material errors or omissions (intended or otherwise) in the
depiction of transactions including explanation of limitations.
Not necessarily 100% free from error use of estimates and
judgment.

B. Qualitative
Characteristics
What are the Enhancing Qualitative
Characteristics of Financial Information?
(VCUT)
Verifiability
Comparability
Understandability
Timeliness

B. Qualitative
Characteristics
Verifiability
Arriving at the same information or result using
the same process of measurement.
Direct Verification (ex. Cash Count, Inventory
Count, PPE Inspection/Count)
Indirect Verification (ex. Recalculation of ending
cost of inventory, recalculation of depreciation
expense, interest expense, etc.).

B. Qualitative
Characteristics
Comparability
Users are able to identify similarities and
differences between two (or more) sets of
economic conditions.
Comparison of FS of the previous period with FS
of the current period (Intra-company).
Comparison of FS of the entity versus a
competitor (Inter-company).

B. Qualitative
Characteristics
Understandability
Classifying, characterizing and presenting
information clearly and concisely make it
understandable.
Two (2) factors: (1) Quality of the information
and; (2) Quality of the user.
The information contained in the financial
statements must be comprehensible and
intelligible to be understood.
B. Qualitative
Characteristics
Timeliness
A relevant information might become useless if it
is not provided on a timely basis.
The information must available early enough to
warrant decision and evaluation by the user.
The older the information, the less useful it is.

B. Qualitative
Characteristics
Limitations and Constraints on Useful
Information
One of the constraints or limitation of
useful information is that, the benefit of the
information must always outweigh the cost
of getting the information (cost constraint).
Judgmental and Relative.

B. Qualitative
Characteristics
What are the Elements of Financial Statements?
The elements of Financial Statements are broad
groupings or classifications of transactions
according to economic characteristics.
Elements of Financial Statements are divided into
two (2) groups: (1) Elements measuring
Financial Position and; (2) Elements measuring
Financial Performance.

C. Elements of Financial
Statements
 Assets
Financial Position Liabilities
Equity
Income
Financial Performance
Expense

C. Elements of Financial
Statements
Elements of Financial Position
Elements of Financial position measures
the entitys position in terms of Assets,
Liabilities and Equity.
As of the end of reporting period
measurement of the entitys financial
position at a point in time.

C. Elements of Financial
Statements
Assets
Resource controlled by the entity as a result of past
events and from which future economic benefits are
expected to flow to the entity.
Recognition principles: (1) Probable future economic
benefits will flow to the entity and; (2) Cost or value that
can be reliably measured.
Characteristics of Assets: (1) Probable inflow of
economic benefits; (2) Controlled by the entity; (3) From
past events.

C. Elements of Financial
Statements
Future economic benefits explained
The potential to generate cash and cash equivalents to
the entity (directly or indirectly) or to reduce cash
outflows.
May be used singly or with other assets in the
production of revenues.
May be exchanged with other assets.
May be used to settle a liability.
May be distributed to the owners of the business entity.

C. Elements of Financial
Statements
Liabilities
Present obligations of the enterprise arising from past
event, the settlement of which is expected to result in an
outflow of resources embodying economic benefits.
Recognition principles: (1) Probable outflow of resources
embodying economic benefits and; (2) cost or value that
can be reliably measured.
Characteristics of Liabilities: (1) Present obligation; (2)
past event and; (3) outflow of economic benefits.

C. Elements of Financial
Statements
Equity
Residual interest in the assets of the entity
after deducting all liabilities and presented
according to source.
Since it is the residual element, the
measurement depends of the measurement
of assets and liabilities.

C. Elements of Financial
Statements
Income
Increase in economic benefits during a period which results
to either increase in assets or decrease in liabilities which
ultimately results to increase in equity other than those relating
to contributions from equity participants.
Recognition principles: (1) Earning process is complete or
virtually complete and (2) Exchange has taken place.
Revenues are generally recognized at the point of sale however
there are special revenue recognition concepts.
Gains and Revenue.

C. Elements of Financial
Statements
Expense
Decrease in economic benefits during a period which results
to decrease in assets or increase in liabilities which ultimately
results in decreases in equity other than those relating to
distributions to equity participants.
Recognition principles: (1) Probable outflow of economic
benefits and; (2) Cost or value that can be reliably measured.
3 bases for recognition of expense: (1) Associating Cause and
Effect; (2) Systematic and Rational Allocation and;
(3)Immediate Recognition.
Losses and Expenses.

C. Elements of Financial
Statements
Measurement Bases
The process of determining monetary amounts at
which the elements of financial statements are to
be recognized and carried in the SFP and SCI.
4 measurement bases: (1) Historical Cost; (2)
Current Cost; (3) NRV (Net Realizable Value)
and; (4) Present Value.

C. Elements of Financial
Statements
What are the Concepts of Capital?
There are two (2) concepts of capital: (1) Financial
Capital Concept and; (2) Physical Capital Concept.
The Financial Capital Concept is synonymous with the
Net Assets and does not require any specific
measurement basis.
The Physical Capital Concept views capital as productive
or operating capacity of the business entity and uses
Current Cost (Fair Market Value) as its specific
measurement basis.

D. Concepts of Capital
and Capital Maintenance
What are the Concepts of Capital Maintenance?
In the Financial Capital Concept, profit is viewed as the
excess of the financial capital at the beginning of the
period over the financial capital at the end of the period
excluding effects of owner transactions.
In the Physical Capital Concept, profit is viewed as the
excess of the operating capacity at the beginning of the
period over the operating capacity at the end of the period
excluding the effects of owner transactions.

D. Concepts of Capital
and Capital Maintenance